David Graeber on sectoral balances.

There have been numerous references on Twitter to this recent article by David Graeber, so I thought I’d have a look. His basic argument leaves room for improvement. The argument runs thus.

He starts by introducing the basic sectoral balance idea with the assistance of the chart below. That’s the idea that if the economy is split into different sectors, like “public sector” “private sector” etc, then money flowing OUT OF one sector must flow INTO another. Thus outflows must equal inflows. And it’s good to see that basic idea being introduced to general public, so congratulations go Greaber for that.

He then tries to extend that idea to DEBT. He tells readers that if government runs a surplus (i.e. there’s a flow of money FROM the private sector TO THE public sector) the result must be an increase in private sector debt. As he puts it, “If the government pays off its debt, what it’s basically doing is transferring that debt directly to you, as mortgage debt, credit card debt, payday loans, and so on.” Whaaaat?

If the private sector has a stock of money (base money to be exact) and £Xbn of that flows into public sector coffers, there is no need whatever for private sector debts to rise by £Xbn or even any need for them to rise at all. All that happens is that the private sector’s stock of money falls by £Xbn.

No doubt if government (to keep it simple) placed a £Y per week poll tax on every adult there would be a TENDENCY for some people to run into debt. So in that case, a government surplus would indeed result in a finite rise in private sector debts.

On the other hand, the TENDENCY is for the better off to pay more tax, and where that’s the case there could be very little rise in private sector debts as a result of a government or public sector surplus.

Certainly, Graeber is going a bit far when he says “If the government pays off its debt, what it’s basically doing is transferring that debt directly to you…”.

It is correct to say that if government pays off £Z of debt, then private sector paper assets will fall by £Z. But as to how far private sector debts rise as a consequence, that’s hard to say without looking a numerous details, like what sort of tax increases are used to bring about the latter government surplus.

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P.S. (30th Oct).  Bill Mitchell comments on Graeber's article in the second half of Bill's blog post. _